Tech

Google shares fall despite strong earnings

Web giant outlines plan to spend more on new hires, acquisitions

JohnLetzing

SAN FRANCISCO (MarketWatch) -- Google Inc. shares fell Friday on fears of increased spending after the Internet search giant reported strong growth in earnings for the first quarter.

Shares of Google dropped more than 7% to close at $550.14. The stock is off about 4% for the year-to-date -- missing out on a broader upswing for the tech sector.

The decline came after Google
GOOG, -1.72%
reported late Thursday that earnings surged 38% in the first quarter, beating Wall Street's expectations thanks to growth in the company's core search advertising business. Revenue also beat expectations for the period. The company maintains a policy of not issuing outlooks for future periods. See full story on Google's earnings.

However, Google hired aggressively in the quarter, and outlined plans to step up spending. It added that it also has a "strong M&A pipeline" in place, suggesting more acquisitions on the horizon.

Goldman Sachs analyst James Mitchell told clients in a note that he attributes Google's stock decline to "Too-much-information syndrome, with investors seizing on any debatably negative data points."

Google said first-quarter net income rose to $1.96 billion, or $6.06 a share, from $1.42 billion, or $4.49 a share, in the same period last year. Excluding special items, Google said earnings for the quarter were $6.76 a share.

Most analysts remained positive on the stock. Mark Mahaney of Citigroup said in a note that Google shares may now be undervalued.

Low valuation?

The slump in Google's shares this year has put the stock below the price targets of nearly every broker covering the shares on Wall Street.

Current price targets on the stock range from a low of $536 to a high of $755, and the current median sits at $687.50. Only two price targets are set below the share's current value; by contrast, 16 brokers have targets set at $700 or higher -- implying an upside of 25% or more from the current market value.

Heath Terry, an analyst with FBR Capital Markets, maintained his $750 price target and outperform rating on Google shares, noting that the company still has a leading position in the market.

"Google is best positioned to benefit from the recovery in ad spending and overall growth in Internet usage," Terry wrote in a note to clients.

Jeetil Patel of Deutsche Bank lifted his price target to $700 from $626 and maintained his buy rating. "Investors should track operating profit dollars, reflecting healthy top-line growth," Patel wrote in a research note.

At its current price, Google shares are trading about 19.7 times estimated earnings for the next four quarters. That's about 37% below the stock's average forward P/E ratio over the last five years, according to relative valuation data from Thomson Reuters.

More hiring, marketing

Google said Thursday it had hired aggressively in the first quarter, adding that its total costs and expenses rose to $4.3 billion from $3.6 billion in the same period a year earlier.

The company hired 786 employees in the period, bringing its total to 20,621 at the end of March and marking its largest quarterly increase in staffing in two years. "We expect to continue hiring aggressively throughout the year," Google Chief Financial Officer Patrick Pichette said during a conference call with analysts.

"Every time I can find another engineer to add to the Chrome OS platform, I'm going to hire him," Pichette said, referring to Google's operating system software. The company also suggested it might be spending more on marketing to build its user base.

Google's rate of paid clicks, or the number of times users clicked on advertisements to generate revenue, rose 15% from the year-earlier quarter. It had posted 13% growth in paid clicks in the prior fourth-quarter report. Analysts had been looking for first-quarter paid-click growth in the range of 12% to 14%.

Meanwhile, the prices paid for those clicks to Google in the first quarter rose 7% from the year-earlier quarter but were down 4% from the sequentially previous quarter.

Google's vice president of product management, Susan Wojcicki, said the dip in prices, or average cost per click, was due in part to an expansion into more obscure search keywords, which can draw fewer bids from advertisers. "Long term, that's good," Wojcicki added, as it presents more future opportunities.

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